(Dry-bulk shipping 2010 preview updated to reflect changes to stocks and underlying fundamentals of the dry-bulk shipping sector.)
NEW YORK (
) -- It may have been the most harrowing period in merchant shipping since German U-boats prowled the lanes of the North Atlantic during World War II.
Anyone who follows the dry-bulk shipping industry knows the story: the worldwide banking-system meltdown in late 2008 yanked ship financing out from under the business. The global economic recession yanked out demand. Asset values plunged; so did shipping rates.
The months that followed in 2009 were wild for the dry-bulk sector, with a Chinese stimulus package rejuvenating its need for raw materials, including iron-ore -- the stuff on which most bulk carriers base their very existence -- to such a level that, during the summer and then again in late fall, shipping rates surged, then fell back again as buying patterns among steelmakers in the People's Republic ebbed and flowed.
Now, with the dry-bulk trade ready to tear December's page from the calendar, two "huge wildcards," in the words of one analyst, face these companies, which are often used as a proxy for the health of world commerce at large. The wildcards are well known, and can be summed up in two words: Supply and demand. Or, more specifically, two further words: Newbuildings and China.
As for the latter, it's a matter of whether the world's third-largest economy will continue importing raw materials at the record pace of the last few months. The bulls say yes, pointing to widespread predictions of 9% GDP growth for China in 2010, which would follow an expected 8% expansion in 2009. Such growth, the optimists argue, would keep the Chinese steel furnaces blazing and the enormous capesize iron-ore haulers steaming briskly en route to Shanghai and other big Mainland ore ports.
The bears, however, wonder whether the authorities in Beijing may try to curb overcapacity. And they wonder whether iron-ore imports will match the heady levels of 2009.
As for the supply side, there's the widespread
to contend with.
With all this as a backdrop, here's a brief breakdown of how five dry-bulk companies might fare in 2010.
The granddaddy of them all, the first dry bulker to go public in the U.S.,
is also by far the most liquid name in the sector, its shares used by hedge funds and retail day traders alike to make short-term bets on the vicissitudes of the often volatile dry-bulk industry.
DryShips suffered through a rougher 2009 than many of its peers. Having levered up in the boom years, the company saw its debt came back to haunt it after the crash. DryShips had to totally recapitalize, raising capital through a series of at-the-market offerings that diluted shareholders vastly. As of Dec. 29, its stock was trading just south of $6 a share, having sank 43.8% year-to-date, making it one of the worst performers in the sector.
The company has also switched parties, so to speak, going conservative. Its converted itself from a shipper 100% exposed to the rowdy spot market to a shipper with 100% of its vessels booked into stolid long-term contracts for 2010.
But that doesn't mean DryShips has become any less lively. Of late, the excitement hasn't come from its dry-bulk business. Instead, the hubbub surrounding the company and its controversial CEO, George Economou, has centered on its
, which operates mobile offshore drilling rigs that specialize in probing for oil in extremely deep waters.
Economou has long said he wants to separate the drillships unit with an IPO. The only problem? DryShips still lacks about $1 billion in financing to pay for the rigs and won't get the money until it strikes charter deals with an oil company, guaranteeing cash flow that a bank would feel comfortable lending against.
recently initiated coverage of DryShips with a buy rating and a $10 price target. Urs Dur, an analyst at Lazard Capital Markets, is bullish on the stock, noting that the drillships business looks robust. He also mentioned a recent offering of senior notes that has reduced DryShips' net debt-to-cap ratio to below 40%. Still, Dur says, his research reports on DryShips are always "thick with risk factors," mostly because of the company's somewhat checkered history. "It's risky, but there's upside," he says.
Widely regarded as the most conservative publicly traded dry-bulker on the water,
has positioned itself to do particularly well in down markets, relative to its peers. Its stellar balance sheet (a debt-to-cap ratio of less than 25%) means that, if rates plunge and the market goes sour, Diana can pounce on vessels and newbuildings that other, financially strapped ship owners can no longer afford. Thus, Diana expands its fleet and turbo-boosts its growth.
The message seems to be: if investors think 2010 will be a tough year for dry bulk, with declining rates and asset values, they ought to go long in Diana stock, which has gained about 14% year to date, a relative laggard.
Diana executives themselves have been notoriously bearish about the dry-bulk cycle in their public remarks. Still, with about 63% of its fleet covered by long-term charters next year, it has some exposure to the spot market and, thus, would benefit from any increase in shipping rates that might occur next year.
JPMorgan's Jonathan Chappell, for one, is not banking on a rate rise in 2010. In fact, his model has day rates for capesize vessels falling 16% in 2010 from the average rate fetched in 2009, about $32,500.
If that happens, look for Diana to go on a shopping spree of its own. The company's pristine finances give it enough liquidity and dry powder to buy as many as 10 capesizes next year, says Robert Mackenzie, the analyst at FBR, though it's highly unlikely that deliberate Diana would actually acquire that many ships in a 12-month span.
Indeed, on Dec. 28, as part of its ongoing fleet-expansion plans, the company announced the purchase of a panamax ship (built in 2004) for $35 million.
Two days shy of New Year's Day, Excel Maritime shares were down almost 9% over the last 12 months as the company had to slog through the collapse in shipping rates in 2009 with an over-levered balance sheet, much like DryShips. Also much like DryShips, Excel had to renegotiate debt covenants and raise capital in the equity markets, diluting shareholders.
Though its debt load remains high enough that it won't have much room for fleet expansion, the worst appears to be over for Excel. Its ships now throw off enough cash that the company will pay down its debt over time, boosting its net asset value.
Indeed, the market has priced Excel shares at a premium to the company's
net asset value, which stands about $3.81 a share, according to FBR's MacKenzie. There appears to be an expectation, then, of an uptick in the company's stock price based simply on increased cash flow affording Excel the ability to continuing zapping its debt.
Though Excel has six capesize ships scheduled for delivery in 2010, MacKenzie expects only two of those ever to hit the water, since the other four were contracted to be built at a greenfield yard that never obtained enough funding to start actually building ships. Because Excel would have a hard time paying for those four ships, an overhang has darkened the company's shares, says MacKenzie.
Once Excel officially removes those four orders from its books, the overhang will disappear. But it can't do so until the stated delivery dates of those vessels comes and goes next year.
Genco Shipping & Trading
Genco Shipping & Trading
, says John Wobensmith, the company's CFO, has put itself in a strong position for 2010 because of its chartering strategy.
When the market plunged amid the financial crisis in late 2008 and early 2009, Genco "didn't panic" like some of its peers, Wobensmith says. With rates on the spot market wiped out, many dry bulkers scrambled to lock their ships into long-term charter contracts -- to, in effect, put as much distance between themselves and that wiped-out spot market as possible.
But Genco, according to Wobensmith, chose to follow the short-term charter route. The result? When rates rebounded later in 2009, the company was able to take advantage, the CFO says. As the short-term charters expired, Genco could book long-term contracts at more-attractive day-rates than those peers who had panicked back when the storm initially hit. "Overall, the strategy has worked out extremely well for us," says Wobensmith.
With 50% of its fleet in long-term charters for 2010, the company has more exposure to any rise in rates in an upmarket next year. Already such particulars have helped its stock outperform the sector. As of Dec. 29, it was up about 51% for the year.
Still, the company, with a 57% debt-to-cap ratio next year, has some balance-sheet issues. Says Chappell, "They'll have to focus on debt repayment before focusing on growth."
One thing for investors to watch for in 2010: Like DryShips -- whose CEO has a bit of a rivalry with Genco's chief, Peter Georgiopolous -- Genco has some intriguing IPO plans. It wants to sell shares to the public in a fleet of ships with 100% exposure to the spot market, giving investors a vehicle with which to play that volatile world. (The company's ships might as well have decks of green felt.) Indeed, this Genco vehicle would be similar to the DryShips of old, before it went 100% into long-term contracts and got into the offshore drilling business.
Wobensmith wouldn't discuss the IPO plans, citing quiet periods, but some analysts wonder if the window for such a share offering might be narrowing. According to the shipping-rate futures market, the smart money appears to be betting on a decline in rates early next year.
will have the exact same debt-to-cap ratio has Genco next year, says JPMorgan's Chappell. But not all such ratios are created equal. Here's one key difference: Navios's ratio assumes the delivery of 10 new ships in 2010 and the financing that goes along with them.
Thus, Navios next year will grow. Chappell sees 2010 per-share earnings for the company of 70 cents, up 40% from his projected 2009 bottom line. Investors appear to have priced at least some (if not all) of this growth into Navios stock, which has done even better than Genco shares in 2009, surging 96% year-to-date as of Dec. 29.
Still, Navios has a relatively conservative chartering strategy, with 83% of its fleet covered in long-term contracts next year. That means the company won't see as much upside should rates strengthen next year as other bulkers.
-- Reported by Scott Eden in New York
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Scott Eden has covered business -- both large and small -- for more than a decade. Prior to joining TheStreet.com, he worked as a features reporter for Dealmaker and Trader Monthly magazines. Before that, he wrote for the Chicago Reader, that city's weekly paper. Early in his career, he was a staff reporter at the Dow Jones News Service. His reporting has appeared in The Wall Street Journal, Men's Journal, the St. Petersburg (Fla.) Times, and the Believer magazine, among other publications. He's also the author of Touchdown Jesus (Simon & Schuster, 2005), a nonfiction book about Notre Dame football fans and the business and politics of big-time college sports. He has degrees from Notre Dame and Washington University in St. Louis.